Making sense of market moves
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If history is any indication, the Federal Reserve’s imminent rate cut could provide an electric jolt to the already high-flying S&P 500 over the next year.
Federal Reserve Chair Jerome Powell has all but confirmed that the central bank will announce a rate cut tomorrow. But whether the Fed will slash rates by 25 basis points, 50, or even 75 as some are calling for, is still an open question.
Powell is hoping to replicate Alan Greenspan’s victorious soft landing back in 1995, when the Fed then lowered rates amid a soaring stock market. To pull it off, Powell is relying on strong corporate profits and a resilient consumer to buoy the economy and protect it from a rate-cut-induced tailspin.
Stocks love rate cuts
The S&P 500, Treasurys, and gold all tend to rise when the Fed lowers rates, according to a Bloomberg analysis tracking rate cuts since 1989. In fact, the S&P 500 rose an average of 13% in the six months following a rate cut during years where there was no recession.
Turning the clock back even further, the short-, medium-, and long-term market returns after a rate cut are impressive.
“During the five cutting cycles since 1984 where the economy did not quickly enter a recession, the S&P 500 typically returned +6% during the three months, +9% during the six months, and +17% during the 12 months after the first Fed cut,” Goldman Sachs Chief US Equity Strategist David Kostin wrote in a recent note.
Going back even further, since 1980, after each of the 20 times the Fed cut rates with stocks near all-time highs, the S&P 500 was higher a year later, according to Chief Market Strategist at the Carson Group Ryan Detrick.
However, past performance doesn’t guarantee future results. After all, the slowing labor market is an ominous macro indication that things won’t be simple this time around.
And the presidential election this year is a wild card that differentiates this easing cycle from past soft landings. Given the highly charged rhetoric and varying economic policies proposed, the market will likely remain volatile heading into November.
So, while it’s too soon to declare victory quite yet, right now the Powell plane looks all clear for soft landing.—LB